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Advantages and Disadvantages of Health Savings Accounts

Advantages and Disadvantages of Health Savings Accounts

Healthcare expenses make a substantial part of the total expenditure that Americans have to incur, both during their working years and post-retirement. Therefore, it helps if you set aside and save a buffer for your healthcare expenses and also that of your family. 

One of the best ways is to save a portion of your Money in HSAs (Health Savings Account). A Health Savings Account is a tax-advantaged savings account for medical expenses. While it is similar to a personal savings account, the money saved in an HSA can only be used for qualified healthcare expenses.

While HSA is tax-deductible, which means you can reduce your taxable income, your HSA funds can also be used as a future investment. HSAs have the upper hand over Flexible Spending Accounts (FSAs) in the sense that the money saved in HSAs need not be spent within a set timeframe. Any unused money that you have in your HSA will roll over from year to year. 

Who is eligible for a Health Savings Account?

To be eligible for an HSA, one must:

  • Choose a High Deductible Health Insurance Plan (HDHP). According to the IRS, an HDHP (for 2020) for an individual is a plan with an out-of-pocket maximum deductible amount of $6,900 (2019 – $6,650) and a minimum deductible amount of $1,400 (2019 – $1,350). As for a family plan in 2020, the out-of-pocket maximum deductible amount is $13,800 (2019 – $13,300), and the minimum deductible amount is $2,800 (2019- $2,700).
  • Not be claimed as a dependent on someone else’s tax return.
  • Not be covered under Medicare.

The Pros of Health Savings Accounts

As we mentioned earlier, HSA acts like a future investment wherein you have the option to invest small amounts and allow it to grow into a large sum over time. The money you invest in an HSA grows on a tax-free basis, and the withdrawals you make to pay for qualified medical expenses are also tax-free. While you can use your HSA funds to pay for your routine medical expenses, the end goal is to save enough money to cover you and your family after retirement.

Here are some advantages of HSAs:

  1. Avail pre-tax benefits

The best thing about HSAs is that contributions made to them are usually made with pre-tax dollars. So, your employer will deduct the HSA funds from your payroll itself. This way, the funds you make to your HSA is not included in your gross income, and hence, the money isn’t subject to federal or state income taxes. 

  1. Boost your retirement

HSAs make for an excellent boost for your retirement plans, that is if the money saved isn’t used. While you can cash out your HSA funds when you’re 65 years old, it isn’t mandatory. There is no mandated payout at age 70½, the typical age of retirement plan terms. 

  1. Employers can contribute as well

Yes, employers, too, can contribute to their employees’ HSA accounts. Usually, employer contributions range anywhere from $500-$2000. While this may be much less than the standard 401K plan, free money is always welcome! 

  1. Reap interests

If your HSA fund remains unused, it accumulates interest over time. An HSA becomes your medical emergency savings. Many HSAs also allow you to choose how your plan is invested. However, the options to invest depends on the HSA company your employer/financial institution uses.

  1. You get ample choices

You can use the money you save in an HSA to cover and pay for all eligible medical expenses that include most medical care such as dental, vision, prescription medications, and even eyeglasses.

The Cons of Health Savings Accounts

  1. A high deductible plan is expensive

To be able to save your pre-tax dollars in an HSA, you must have a high deductible plan, which means that you will have to pay more money out of your pocket before your HSA medical coverage actually kicks in. Also, you will have to incur high upfront costs every time you wish to use your medical coverage in the year until you reach the deductible ceiling.

  1. There’s a limit to what you can contribute

HSAs come with set limitations on how much money you can contribute to your account each year. As for 2020, the contribution limit for professionals who are eligible for family medical plans is $7,100 (2019 – $7,000). However, if you are 55 years or older, you can save an additional $1000 to that limit.

  1. You may have to incur penalties

Since HSA funds only cover certain qualified expenses, if you use the money for any other medical expenses (outside of what is allowed), you will have to pay penalties. Moreover, many HSA companies also charge maintenance fees.

  1. Risks

HSA is not without risks. It is quite similar to 401Ks as in your investment is associated with typical market risks. As the money you save in your HSA is invested in the market, any downfall in the market can lead to a fall in your account values. 

In case, you still have questions about HSAs, please contact MyTaxFiler experts who can help you capitalize on it and save considerable amount of your taxes.

This post first appeared on Mytaxfiler –, please read the originial post: here

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Advantages and Disadvantages of Health Savings Accounts


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